Friday, July 20th 2018

US trade deficit with China, Can they both win


Wednesday, February 17th, 2010

The Idea is everyone can benefit from international trade, as per Adam Smith's original ‘Wealth of Nations' principles with a country having a specialized focus on labour using its comparative advantage such as China does with its lower costs of labour,  indicating that a good can be produced most efficiently. (This is with ignoring the lack of EPA regulations and other health and safety requirements imposed on US businesses)

So looking at the winners and losers currently it seems that the US is losing with a trade deficit of 40.18 billion US in December 2009 with approximately 18 million of that to china, while 12 million was attributed to Mexico, Japan and Canada. So while China share is significant, there other still other imbalances with its other trade partners.

However many US companies have subsidiary presences in China for example Google China, GM joint ventures and Yum brands KFC. So looking at what the potential impacts are for the US when these companies invest abroad it may seem a bad deal for the US labour market.

The flying geese model in economics describes that foreign direct investment can be beneficial to the country receiving the FDI. In summary foreign direct flows are directed to a country with lower costs of capital and other benefits. This capital develops an industry such as textiles and therefore the demand for labour goes up also. The money from FDI is now circulating in the economy and into government revenues. The government can now invest in infrastructure and future industries. Wage pressure in these industries eventually go up to an uncompetitive level.  This will eventually make an industry such as textiles no longer affordable or better deal any longer. The foreign direct investment is now directed elsewhere and at the same time newer industries have developed in that country because of the FDI inflows. Examples of these countries include Japan and South Korea.

However on the positive aspects for the US, eventually there will be outflows of capital out of that country when the domestic market picks up. The citizens of the country that benefit will buy products and services from the company that invested there.  These will end up in company bottom lines and then into US government revenues. So while it may seem that US citizens are getting a bad deal right now,  in the future they could benefit from outflows out of countries such as China.

 



Article by James Jones

The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com



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